Interest Calculator - Simple vs Compound Interest Calculator (2024)

This simple interest calculator figures both monthly interest income payments and compound growth so...show more instructions

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How Interest Grows Your Investments

Sure, you already know that you earn interest when you deposit money – but exactly how does it work?

Interest is a fee that is paid by a borrower to an investor, compensating the investor for the use of their funds. Interest rates are one way financial institutions encourage deposits – and they're also a way for them to make money from borrowers.

Interest is usually calculated based on the principal and it can be easily calculated using this Interest Calculator.

Variable Vs. Fixed Interest Rates

Variable interest rates – also known as floating interest rates – are not fixed, but are dependent on market performance. If the market is volatile, interest rates also change dramatically during the entire course of the term. If you do not expect to keep a loan for a long time, then a variable interest rate may be more desirable over a fixed interest rate. The downside to variable rates is that if the interest rate rises, you may not be able to meet your payment obligations.

Fixed interest rates, on the other hand, do not change over the course of the term. The advantage of a fixed interest rate is that it allows you to plan your spending easily – the rate is set in stone. The disadvantage is that if interest rates drop significantly, as a borrower you'll still pay the higher, original rate.

Simple Vs. Compounded Interest

Simple interest rate is calculated by multiplying the principal by the interest rate by the number of payment periods over the life of the loan. Here's the formula:
Simple Interest = P x I x N

P = The loan amount.

I = The interest rate.

N = The duration of the loan using the number of periods.

Compound interest refers to charges that the borrower must pay not just on the principal amount borrowed, but also on any interest accumulated at that point in time.

Related: Why you need a wealth plan, not a financial plan.

This online interest calculator compounds on a monthly basis, helping you determine the affects of compounding on interest-earning investments.

Compare Interest Rates

Before you invest money, first compare and calculate the affects of various interest rates. Interest rates should play an important role in your decision-making process.

This interest calculator not only shows you the affects of simple monthly interest, but it also shows you the future value if interest is compounded every month. Choose an investment (such as a savings account or other financial product) with a high interest rate that compounds – you'll be glad you did.

Interest Calculator Terms & Definitions

Amount Invested – The amount you plan on investing over a certain term (number of years).
Annual Interest Rate – The annual percentage interest rate your money earns if deposited.
Number of Years for Compounding – The number of years your investment will compound (also called the “term”).
Simple Monthly Interest Income Payment –The amount of interest earned every month.
Total of Interest Payments – The sum of all the interest payments earned over the term.
Future Value (with Compound Interest) – The value of the investment at the end of the term accounting for interest and compounding.
Compound Interest – Interest that is added to the principal of a deposit, resulting in interest earning interest.

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Interest Calculator - Simple vs Compound Interest Calculator (2024)

FAQs

How to know if interest is simple or compound? ›

Interest can be calculated in two ways: simple interest or compound interest.

Simple interest is calculated on the principal, or original, amount of a loan.
Compound interest is calculated on the principal amount and the accumulated interest of previous periods, and thus can be regarded as “interest on interest.”

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What is the difference between simple interest and compound interest calculator? ›

Simple Interest: Calculated annually on the amount you deposit or owe. Compound Interest: Interest earned is added to the principal, forming a new base on which the next round of interest is calculated. This can accrue daily, monthly, or quarterly.

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Which is more powerful simple interest or compound interest question? ›

Compound interest earns you more money in your bank account, even if you don't add to your account in the meantime. But if you borrow money, you'll pay more with compound interest, and the shorter the compounding period, the more you'll pay over time.

Would it be better to receive simple interest or compound interest? ›

When it comes to investing, compound interest is better since it allows funds to grow at a faster rate than they would in an account with a simple interest rate. Compound interest comes into play when you're calculating the annual percentage yield. That's the annual rate of return or the annual cost of borrowing money.

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What is the magic of compound interest? ›

When you invest, your account earns compound interest. This means, not only will you earn money on the principal amount in your account, but you will also earn interest on the accrued interest you've already earned.

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What is the formula for calculating compound interest? ›

The formula for calculating compound interest is P = C (1 + r/n)^nt – where 'C' is the initial deposit, 'r' is the interest rate, 'n' is how frequently interest is paid, 't' is how many years the money is invested and 'P' is the final value of your savings.

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What is an example of simple and compound interest? ›

With simple interest, you would add 5% of $100 - $5 - each year for 10 years, for a total of $50 worth of interest. You would end up owing $150 after 10 years. If you were paying 5% interest compounded annually, though, you would take 5% of the amount each year - including any interest that has already accumulated.

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How to convert simple interest to compound interest? ›

A = P(1 + r)^t

A is the amount of money after the interest has been compounded.
P is the principal amount.
r is the interest rate.
t is the time period in years.

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How to calculate simple interest? ›

Simple interest is calculated by multiplying the principal, the amount of money that is initially invested or borrowed, by the rate, the speed at which the interest grows, and the time, how long money is being invested or borrowed. In other words, the formula for simple interest is I = P R T .

When to use compound interest formula? ›

The compound interest equation is used to find the accrued amount when the principal, rate, compounding period, and time are known. Using algebra, the formula can be manipulated to find the other values.

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What are the disadvantages of simple interest? ›

Simple interest has the disadvantage that if the interest rate is high, the borrower will pay more. Furthermore, if the repayment period (years) is greater, the borrower will pay more.

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What are the disadvantages of compound interest? ›

Disadvantages Explained

Works against consumers making minimum payments on high-interest loans or credit card debts: If you only pay the minimum, your balance could continue growing exponentially as a result of compounding interest.

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How much is 5% interest on $10,000? ›

Simple Interest Examples

You want to know your total interest payment for the entire loan. To start, you'd multiply your principal by your annual interest rate, or $10,000 × 0.05 = $500. Then, you'd multiply this value by the number of years on the loan, or $500 × 5 = $2,500.

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Do banks use simple interest or compound interest? ›

Hence, Banks use both simple interest and compound interest.

Why choose compound interest over simple interest? ›

It makes a sum of money grow at a faster rate than simple interest because you will earn returns on the money you invest, as well as on returns at the end of every compounding period. This means that you don't have to put away as much money to reach your goals!

What is an example of a compound interest? ›

To illustrate how compounding works, suppose $10,000 is held in an account that pays 5% interest annually. After the first year or compounding period, the total in the account has risen to $10,500, a simple reflection of $500 in interest being added to the $10,000 principal.

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What's the difference between simple and compound sentences? ›

A simple sentence contains one independent clause; a compound sentence contains at least two independent clauses and no dependent clause. A complex sentence contains an independent clause and two or more dependent clauses.